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To: baystock who wrote (26429)	1/18/1999 6:46:00 PM
From: Hawkmoon	Respond to of 116874

Ram, I don't feel I was contradicting myself. I think it is just because deflation is such a strange beast that we haven't had to really deal with since 1929. I believe that we have been in a deflationary period relative to where we stood economically two years ago before the collapse of the Thai market. In the meantime the Fed reserve has been injecting liquidity through the printing of dollars and lowering of the Fed funds and discount rate. Manipulating the FF/DR lowers rate that banks borrow from the Fed at, not the rate you or I can hope to get a loan for. It increases the profit margins of money center banks to prevent illiquidity regarding their reserves and assets. Had not the Fed done this, the dollar would be even stronger and many banks would probably be under the control of regulators now. By increasing liquidity, they essentially inflated the amount of dollars in circulation in order to counteract deflation pressures from overseas currency devaluations. As a result credit has been relative "cheap" and the US economy stimulated in an attempt to maintain a marketplace for foreign goods so they could attempt to export their way out of recession/depression. The decision to devalue the dollar would suggest that we are now convinced we have done what we can for the world and now have to look to our own interests. (Kinda frightening) As for other economies "choosing" reflation, I must disagree. They did not choose it. It was forced upon them as investors and speculators sold those currencies and bought dollars, euros, and yen, strengthening the reserve currencies as a result and forcing the Fed to lower rates in an attempt to maintain an equilibrium. However, despite the best efforts of the Fed to maintain currency, and thus price, stability, the dollar continued to maintain its strength as more money fled from overseas and headed for safer havens. The result has been a significant increase in the US trade deficit, which ultimately will cost US jobs and calls for protectionist measures. I believe the inevitable result of a dollar devaluation will be further pressures on foreign economies who find the price of their manufactured goods less competitive with domestic US goods. (commodities producers should benefit from relatively higher prices if denominated in dollars). If the US devalues it will help some countries who mainly export commodities, while leaving others to be sacrificed on the altar of profits. If what Bill Murphy claims is true, this is pure economic dynamite and will crash markets around the world eventually. I hope that this explains my perspective a little better. Regards, Ron